The specialist sector was and continues to be a mishmash of funds but that jumble hides a number of key investment trends such as the relative outperformance of the almost forgotten area of healthcare.
Emerging markets dominate headlines these days and it is developments in these regions that could lead to resurgence in the popularity of healthcare and biotech investments. After all, when respected fund managers such as Neil Woodford and Anthony Bolton talk of opportunities in this sector, it tends to attract attention, especially with Woodford saying there have been only a few occasions in his career where he has seen the kind of opportunity he currently sees in pharmaceuticals.
Healthcare-related portfolios have waned in popularity over the past 10 years, replaced by today’s trends of absolute return, foreign income and country-specific vehicles. Biotech became tainted with the collapse of the TMT bubble and many investors who bought into this sector a decade ago are still sitting on losses. But a lot has changed since the turn of the century and although this area of the market has garnered little attention, it has been a solid performer.
In the very difficult year of 2008, when virtually every asset fell, it was the biotech sector that held up particularly well. Financial Express stats shows the biotech and healthcare investment trust sector rose 5.41 per cent while over the past five years, trusts in the sector have returned on average 43.74 per cent.
Of the two biotech funds in the IMA’s specialist sector, both achieved double-digit gains in 2008 – Franklin Templeton biotech and Axa Fram-lington biotech gained 19.7 and 15.45 per cent respectively. The two healthcare funds in the specialist peer group, Invesco global health care and Axa Framlington health, may have made losses that year but they were limited ones. The two portfolios fell by 2.74 and 7.69 per cent respectively.
Over the longer term, the open-ended healthcare and biotech funds have also fared well. In the past five years, Axa Framlington Biotech has had just one negative year, 2007, when it fell by 3.87 per cent. The Franklin Templeton biotech port-folio posted negative returns in 2006 and 2007, falling by 7.68 and 2.73 per cent respectively, but over the cumulative five-year period, it has returned 36 per cent. Invesco’s global healthcare fund is up by 13.71 over five years while Axa’s healthcare portfolio has gained 17.63 per cent.
Some of the rationale behind biotech and healthcare’s investments is similar to the reasons many cite for investing in commodities or emerging markets – changing demographics and way of life.
Schroder’s medical discovery fund manager John Bowler (listed in the global sector according to Financial Express data), noted the 60-plus age group is one of the fastest-growing groups in society. According to US population census data between 1995 and 2000, the annual growth rate for those aged 60 to 70 was just 0.1 per cent – these days, it is 4.4 per cent. But the opportunities in health-care are not just the well documented aging populations of the West as emerging markets are undergoing a different but substantive change that have heavy impacts on the healthcare market.
For instance, Fidelity’s research team recently highlighted diabetes care leader Novo Nordisk and United Laboratories as two potential bene-ficiaries of growing healthcare spend in developing nations. According to the group: “Historically, a disease associated with the US and Europe, diabetes incidence has been rising rapidly in developing countries where lifestyle diseases are over-taking infectious diseases as the primary concern. Rising incomes and the expansion of the middle class in fast-growing emerging markets are seeing structural changes in diets as consumers move from generally healthy, low-calorie diets high in grains and vegetables to higher-calorie, Western-style diets that tend to contain more meat, dairy and, critically, sugar. This, combined with the industrialisation and urbanisation of rural economies, has meant more sedentary lifestyles for many people, partic-ularly those living in cities.”
Recent studies suggest China has an estimated 92 million diabetes sufferers – more than the population of the entire UK – and yet just 12 million have been diagnosed and only 10 million get treatment.
Fidelity China special situations fund manager Anthony Bolton says: “The fundamentals for the diabetes care market, especially in Asia, are particularly attractive as the disease increases in prevalence. While Novo Nordisk is the dominant name in the insulin industry, I am playing the theme in the Chinese market through United Laboratories. The com- pany has the potential to take a meaningful share of the rapidly expanding Chinese insulin market and may, in time, also benefit from exporting insulin to other markets.”
Bolton is currently overweight in the healthcare sector, with 9.5 per cent of his portfolio in this area versus a benchmark weighting of 0.8 per cent. It is the third-biggest sectoral position in the trust.
Invesco Perpetual’s Neil Woodford also favours healthcare, recently indicating he intends to raise his weighting to this area, which already stands at around 25 per cent.
He believes pharmaceuticals look attractive as they are relatively undervalued. Patent expiries and research and development chall-enges may be dragging down valuations but Woodford believes investors are not focusing enough on the opportunities that healthcare stocks represent.
He says: “There are opportunities in both the emerging world, where there is a huge unmet dem-and for the drugs that consumers cannot get access to from domestic manufacturers, as well as in the developed world, where aging demographics are driving increased demand for drugs. Globally, there is an increasing prevalence of the diseases that are treated with the drugs that these companies inno-vate, produce, market and sell.”
Woodford agrees a catalyst to change perception is needed to re-rate the sector but says his decisions are focused on where he sees the best value, not whether a re-rating is imminent.
He says: “I cannot tell you what the catalyst is or when it will happen but the longer it goes on, the more testing it will be for the market to ignore the fundamental valuation in this sector, which is unprecedentedly attractive.”